OCR cut good for business confidence

Today’s one per cent reduction in the Official Cash Rate will be good for business confidence and is a reasonable move, says Business NZ.

Chief Executive Phil O’Reilly says inflation is no longer the bogey it was, with international oil prices having dropped around 50 per cent in the last three months.

But he says the move won’t necessarily bring significant interest rate cuts.

“Given NZ’s relatively high reliance on international credit, with around one-fifth of bank funds sourced off-shore, and the international re-pricing of credit risk, it is not obvious that interest rates facing businesses and consumers will go down.

“Also, given that New Zealand has yet to guarantee wholesale market transactions between New Zealand and overseas banks, there is a chance that international credit to New Zealand banks could dry up. While this is not an issue in the very short-term, it could become a problem by Christmas if overseas banks see New Zealand banks as not having government backing.”

Mr O’Reilly said the Reserve Bank is in a reasonably strong position to reduce the OCR further if warranted although any further significant drop in the exchange rate, while good for exporters, could bring the potential for imported inflation.